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WASHINGTON – Why should franchisees and their attorneys pay attention to the top 12 legal cases picked by one of the largest franchisor law firms? Because these cases and rulings represent a growing trend in our business sector today, that which shapes the relationship between franchisor and franchisee.
These 2012 court rulings shed light on a number of issues: Whether franchisors can control the prices of products store owners sell; whether companies can terminate franchisees for having a criminal conviction; and whether franchisors can be forced into a class arbitration. Another deals with franchisors exerting so much control over the franchisee’s business that they are ruled as an “employer” of franchisees under wage-and-hour statutes.
In their February webinar presentation, DLA Piper attorneys Barry Heller, John Hughes and John Verhey presented their top 12 cases. Their criteria for their selection was to choose those that were decided in 2012, provided guidance as to business considerations for franchisors, and those that represented a growing trend in franchising. Cases were not presented in any order of priority.
Blue MauMau attended the webinar to provide its readers a sampling of the cases. While a few are highlighted below, all cases may be viewed in the webinar attachment.
Question: What can franchisors do to avoid being found as an “employer” of their franchisees and their employees?
Answer: Minimize involvement in franchisee’s hiring, firing, compensation, and in scheduling/evaluation/disciplinary matters. Limit access to franchisee’s information on employees; issue policy recommendations rather than mandates; justify franchisor’s controls as necessary to protect trademarks, goodwill, brand consistency.
Question: Can franchisors terminate a franchisee based on a criminal conviction?
Answer: Do not assume that any sort of criminal conviction will provide adequate grounds for termination. When terminating a franchise agreement, franchisors must be mindful of termination provisions in the contract and in applicable relationship statutes.
IHOP terminated immediately. Franchisee continued to operate. IHOP sought preliminary injunction. Court found that the conviction of the franchisee’s president was not directly related to the business . . . and the termination did not comply with state franchise law. IHOP then served an amended notice of termination, giving the required 60 days notice. Franchisee continued to operate after termination date, and IHOP filed for preliminary injunction.
In the end, court ruled IHOP was likely to prevail on merits of the case, that IHOP was a family-friendly establishment, and that the convicted president would be going to prison for at least three years and couldn’t participate in the day-to-day operations. Preliminary injunction was entered by the court in favor of IHOP.
Question: Can your marketing efforts result in substantial liability?
Answer: Yes. Franchisors should avoid robo-calls and text messages unless they have a prior relationship with the recipient. They should also instruct franchisees of the Federal Telephone Consumer Protection Act (TCPA) requirements, although they risk vicarious liability. And before recommending a telemarketing firm, franchisors should ask whether they are knowledgeable concerning TCPA requirements.
While Domino’s allowed the telemarketing firm to exhibit at its convention, helped grow its business with franchisees, and required the use of its “PULSE” software in Domino’s system, the court ruled in the franchisor’s favor. “The plaintiff could not prove that Domino’s had “used” the automatic dialing device, and it was not enough that Domino’s benefited from the calls.”
Other Top 12 Cases Cited
In addition to the five cases above, DLA Piper attorney address the following, to be found in the attached presentation:
Does presumption of irreparable harm still exist in trademark infringement cases in the franchise context?
Can franchisors control the prices of the products franchisees sell?
Are Franchise Agreements of perpetual duration?
How can franchisors maximize the chances of enforcing your post-term non-compete covenant?
Can franchisees avoid their arbitration agreements by suing through a franchisee association?
Does the California Franchise Relations Act trump an out-of-state forum selection clause?
Do franchisors have a legal obligation to increase (or at least maintain) the value of their franchise system?
Will franchisors face a class action in arbitration?
|DLA Piper FINAL PRESENTATION 3012 - 12 Cases.pdf||1.91 MB|